Market design for electricity – Comparing the US and EU | Fabien Roques

Summary

In this lecture, Fanny Hawk, an associate professor of economics, discusses the unique challenges of electricity markets due to electricity's non-storable nature and variable supply and demand. She compares the European and US approaches to market design, highlighting differences in system operators, balancing mechanisms, and market principles. Hawk emphasizes the importance of real-time trading as renewables increase and suggests Europe could learn from recent US developments.

Takeaways

• 🔌 Electricity is non-storable in large quantities at an economic cost, although technologies like batteries and hydro storage are developing.
• 🌡️ Supply and demand for electricity are highly variable, with renewables being a notable source of variability.
• 💡 The demand for electricity is fairly inelastic, posing challenges for market design.
• 🔄 The law of clear cover mandates that demand must equal supply at all times and at every node in the network.
• 🌍 In Europe, the Transmission System Operator (TSO) is separate from the market, whereas in the U.S., the Independent System Operator (ISO) combines market and system operations.
• 📈 The sequence of power markets includes forward markets, day-ahead markets, and real-time markets, culminating in real-time get closure.
• 🔄 Balancing mechanisms and ancillary services like reserves are crucial for maintaining system balance in real-time.
• 🏛️ There are philosophical differences in market design between Europe and the U.S., including self-dispatch and centralized dispatch.
• 🌐 The main market in Europe is the day-ahead market, with a concept of balance responsible parties, while in the U.S., there's co-optimization and real-time markets.
• 💼 The U.S. typically has a two-settlement system with centralized dispatch, while Europe has a main day-ahead market with a residual role for balancing.
• 🌿 The move towards a system with more renewables will require trading as close to real-time as possible, which could benefit from U.S. practices.

Q & A

What are the primary constraints of electricity as a good?

The primary constraints of electricity as a good are that it is non-storable in large quantities at an economic cost, supply and demand are highly variable, and demand is inelastic. Additionally, the law of Kirchhoff's currents requires demand to equal supply at all times in every node of the network.

Why is electricity difficult to store in large quantities?

Electricity is difficult to store in large quantities because current storage technologies like batteries and hydro storage are either expensive or limited in capacity. This makes it challenging to store electricity economically in significant amounts.

How does the variability in supply and demand affect electricity markets?

Variability in supply, due to factors like renewable energy sources and seasonal changes in hydro or thermal power availability, and inelastic demand, makes it challenging to balance the grid. This leads to complexities in designing electricity markets to ensure stable supply and pricing.

What role does a system operator play in electricity markets?

A system operator ensures that the electricity network remains balanced in real-time across every node. They manage the balancing mechanism, coordinate ancillary services like reserves, and take control of the system after market closure to ensure supply matches demand.

What is the key difference between European and U.S. system operators?

In Europe, the transmission system operator (TSO) owns and operates the network separately from the market, while in the U.S., Independent System Operators (ISO) handle both market operations and system balancing, though they do not own the transmission network.

What is the role of the day-ahead market in Europe versus the U.S.?

In Europe, the day-ahead market is the primary market for electricity trading, while in the U.S., there is a two-settlement system involving both the day-ahead and real-time markets. In the U.S., day-ahead markets are also co-optimized with reserve markets.

How do balancing responsibilities differ between Europe and the U.S.?

In Europe, market participants are responsible for self-balancing, with transmission system operators stepping in only for residual balancing. In contrast, in the U.S., ISOs or RTOs (Regional Transmission Operators) are primarily responsible for balancing the system.

What is the philosophical difference between European and U.S. electricity market designs?

The philosophical difference lies in Europe’s focus on decentralized self-balancing and the day-ahead market, while the U.S. employs centralized dispatch with more integration between real-time and day-ahead markets, allowing for more market arbitrage.

What are the approaches to congestion management in the U.S. and Europe?

In the U.S., congestion management is handled through a fully integrated approach with nodal pricing, while in Europe, it is managed through market couplings between price zones and discretionary actions by TSOs.

Why might the U.S. approach to co-optimizing reserves and energy be relevant to renewable energy integration?

As the electricity grid incorporates more renewable energy, the U.S. approach to co-optimizing reserves and energy offers a system that trades closer to real-time. This allows for more flexible and responsive market operations, which could be beneficial for managing renewable variability.